The January results for the Federal Government’s TSP fund have been released. Investors have gotten used to seeing a negative return on stocks for the past several years and, unfortunately, January was no exception.
The C fund dropped 2.67% for the month and is down 22.99% for the past twelve months. The small cap fund did a little better dropping 2.35% for the month and it is down 18.42% for the past twelve months. The international stock fund (the I fund) dropped 4.24% for the month and it is down 15% for the past twelve months.
But, for those who have wisely diversified their portfolios, the bond funds did better. The F fund returned 0.10% for January with a positive 9.52% return for the past twelve months. The reliable G fund gave investors 0.35% for the month with a 4.89% positive return for the past year.
What is the lesson here, if there is one? Only that diversification between different types of investments will usually reward the patient investor. Financial analysts are all over the lot on what will happen to stocks during the remainder of the year.
Here’s an example. You may have heard of the “January Barometer.” While this may seem a little wierd to you, here’s the theory and why some people pay attention to it (along with the length of women’s skirts and which conference wins the super bowl). The “January barometer” theory has actually worked with surprising accuracy over the last 53 years. The theory is that if the S&P 500 index goes up in January, the rest of the year will follow the same trend. Conversely, a decline in the January results for the S&P indicates that the market will go down in the rest of the year. (The C fund of the TSP is based on the 500 stocks in the S&P index.)
Since 1950, this barometer has only been wrong just 10 times. It was only off significantly (more than 5%) in four of those years. So, since the S&P 500 went down 2.7% in January, this theory doesn’t bode well for the rest of the year if you happen to believe in it.
On the other hand, the market has been down for three years in a row. That is very unusual; in fact it only happened once in the last century. Moreover, the stock market usually does very well in the third year of a president’s term.
Obviously, a lot depends on what happens with the situation in Iraq and Korea. There is a good chance that once a war starts in Iraq and if it goes well for the United States, the market will rally significantly.
Since these are not predictable, keeping your investments spread between bonds and stocks is the safest course. Of course, if you are feeling lucky, stocks may take off later in the year and make up some or even all of the ground lost during the past twelve months.
Enjoy the ride.